While a bank deposit will yield around 8-10% a year, lending directly to a borrower via P2P lending platform can get you an average return of 17-19%.

While a bank deposit will yield around 8-10% a year, lending directly to a borrower via P2P lending platform can get you an average return of 17-19%.

Banks have a neat way of making money. They take your money and lend it to another party at a higher rate than they promised you as interest. For the service and the risk they take, they keep a cut--the difference between their lending rate and the rate of interest at which it was borrowed from you. Here, the returns are definite. Therefore, except bank deposits, there is hardly any other investment which gets you an assured return at the end of the investment tenure. However, for the investor, this also means paying high service charges to the intermediary that eats a huge chunk out of the profit-pie.

How about skipping a step? Lend it directly to the borrower than going through the bank. Agreed it gets a little risky but then the returns are also much higher. While a bank deposit will yield around 8-10% a year, lending directly to a borrower through a peer-topeer, or, P2P lending platform can get you an average return of 17-19%. You can invest starting from as little as Rs 50,000 and for a tenure ranging from 6 months to 36 months. Sounds interesting? Here's how you can invest through these online lending platforms, the risks and the returns.

SAFETY FIRST

The P2P sites are unregulated and do not come under the purview of the RBI. So you have to tread carefully . The sites however are a closed-market place which borrowers can enter only after a thorough background check."We reduce the risk by helping investors take decisions based on verified information," says VVSSB Shankar, Founder of Hyderabad-based P2P lending platform, i-Lend.in Borrowers are listed only after they pass through the stringent evaluation which includes physical verification of home and office address is physically verified, collection of six months bank statements, salary slips as employment proofs, three-year ITR records. Borrower information is validated through checking PAN and Aadhar card, CIBIL score details, paid utility bills and balance sheet in case of business borrowers.

"We have tie-ups with companies that help us in scraping bank and credit card data of the borrower. We also evaluate borrowers' social data through LinkedIn and Facebook. LinkedIn gives us information on the frequency of job movement, employment history etc. We are soon moving into psychometric testing to evaluate the borrower's intention to pay," says Rajat Gandhi, Founder and CEO, Faircent.com, a Gurgaon-based P2P lending platform. "Only 8-10% of the borrowers who register on the platform are listed, we reject over 90% of the borrowers through our algorithms," says Gandhi.

Moreover, a loan agreement is signed between the borrower and the lender.This is drafted by a law firm and contains all standard terms and conditions for performance of the loan between two individuals. "We have the sample contract on the site that is executed on a stamp-paper and is admissible in court of law," says Gandhi. The borrowers are also required to issue postdated cheques in the name of the lenders, which if bounced attract section 138, a criminal offence.

For these services, the portals take a commission. While i-Lend charges charge from 1 to 1.5% of the investment amount from lenders, Faircent takes a listing fee of Rs 1,500 to invest up Rs 1.5 lakh. Thereafter, for every lakh, it charges an additional processing fee of Rs 1,000

LEND WHOM AND HOW MUCH

To make the decision making easier, based on their financial and credit profile, these sites categorise borrowers under different risk bucks. Borrowers are evaluated on five broad parameters--financial history , credit history, bank transaction data, social footprint and personal details such as family's collective financial position. "A score is given on the above parameters within which 50% weightage is given to the CIBIL data," says Gandhi. You can then chose according to your risk appetite. Of course, higher the risk, better the returns (see table.) To reduce the risk further, these sites makes it compulsory for the investor to diversify . Also, even if you choose investments in the same risk category , you will still have a portfolio of at-least 4-5 borrower's with different credit profiles, which reduces the risk of losing significantly.

GUARD AGAINST DEFAULTERS

Neither do these sites do not stand as guarantors for the borrowers nor do they assure the principal. Therefore, the risk you take is purely yours. The platforms however claim a 'zero-default' rate so far. "We have some delayed payments but no delinquency as of now," says Shankar. According to these sites, majority of the borrowers who delay their payments is due to bad financial discipline. But they payback within the month or next month. In the worst case default scenario, these platforms facilitates the collections through empaneled agencies. The services of these agencies are to be borne by the borrower if the money is recovered or by the lender if the money is not recovered.

These sites currently are not covered against non-payments due to redundancy , illness or death of the borrower.